Even Andrew Bailey, the new governor of the Bank of England, has warned about such behavior. He underscored the dangers by mentioning the recent failures of two US firms, First Brands and Tricolor. One of these, he argues, may be bad signs of something worse—a much more systemic risk coming from the financial system. Bailey in oral testimony before a House of Lords committee underscored the disastrous state of affairs. He added that “alarm bells” are going off over these happenings.
Bailey was preceded on stage by Jamie Dimon, CEO of JPMorgan Chase. Dimon cautioned that the collapse of these firms would be the start of a larger wave of volatility in the market. The governor warned that the time for caution has passed. He noted the difficulty in determining whether these collapses are one-off occurrences or indicative of broader systemic issues at play.
“I think the big question… is: are these cases idiosyncratic, or are they what I call the canary in the coalmine?” Bailey stated, highlighting his concern over whether these events signal more significant underlying issues in the private finance and private assets sector. He went on to explain more about the issues plaguing First Brands and Tricolor. Whether these problems are indicative of broader trends in the US economy is an open question.
Bailey emphasized the parallels between our current financial environment and the 2008 financial crisis. He reminded us that at the time, sub-prime mortgages were considered “too small to be systematic.” He warned that the same kind of complacency might have grave consequences if allowed to fester.
“And, you know, if you’re involved before the financial crisis, the alarm bells start going off at that point.” – Andrew Bailey
Further, Bailey criticized the specific way they were currently structuring loans going out through private credit companies. He referred to the practices of “slicing and dicing and tranching of loan structures” which he believes could obscure potential risks in lending practices. Such a focus dovetails with his general worry over fiscal sustainability following last year’s wave of corporate bankruptcies.
Though Bailey’s concerns were substantial, he was always careful to strike a positive, measured tone. He said he didn’t want to be too apocalyptic at this early juncture. He recognized the necessity for vigilance, suggesting that “my antenna goes up when things like that happen,” echoing sentiments shared by Dimon regarding the potential for further issues.
In response to these developments, Bailey announced plans to conduct a stress test of private equity and credit firms to better understand their resilience in a potentially volatile environment.
“Are they telling us something more fundamental about the private finance and private assets sector?” – Andrew Bailey
Bailey and other fiscal hawks are currently trying to figure out the ramifications of these crashes. Unquestionably, uncertainty still hangs over the current state of the financial system. Those lessons learned during earlier crises will be invaluable as they steer through these stormy waters.